Computing the Total Assets, Liabilities, and Owner s Equity

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Assets are the total of your cash, the items that you have purchased, and any money that your customers owe you. Liabilities are the total amount of money that you owe to creditors. Owner’s equity, net worth, or capital is the total value of assets that you own minus your total liabilities.

To put it another way, owner’s equity plus liabilities equal assets. Accounts representing these three items will make up your company’s financial statements.

Assets  Liabilities  Owner’s Equity Owner’s Equity  Assets  Liabilities Liabilities  Assets  Owner’s Equity

Find the assets, liabilities, and owner’s equity.

Kevin Crawford and Crystal Alesio started Customized Websites, a Web design firm. They each contributed $10,000 of their own money and borrowed $50,000 from the bank to pay for computers and the necessary peripherals. Computers cost them $5,000, while printers, scanners, and software cost them $27,500. Office furniture cost them an additional $7,500, which they have not yet paid.

What are their assets, liabilities, and owner’s equity?

1. Find the assets.

Cash (2  $10,000)  Bank Loan ($50,000  $5,000  $27,500)  Computers ($5,000)  Computer Peripherals ($27,500)  Office Furniture ($7,500)  $77,500 assets

2. Find the liabilities.

Bank Loan ($50,000)  Unpaid Office Furniture ($7,500)  $57,500 liabilities 3. Find the Owner’s Equity.

$77,500  $57,500  $20,000 owner’s equity

Find the liabilities, assets, or owner’s equity in the table below.

5. Dr. Doug Moore and Dr. Kim Peters started Valley Dental.

They each contributed $7,500 of their own money and borrowed $100,000 for equipment and supplies. Dental equipment cost them $81,000 and supplies amounted to $3,467, which they have not yet paid. What are their liabilities?

A. $118,467 B. $103,467 C. $100,000 D. $15,000 Standardized Test Practice

Liabilities Assets Owner’s Equity

$ 45,000 $25,000

$100,000 24,750 57,827 75,000

343,327 4,273

Practice Example

Computing the Total Assets,

Liabilities, and Owner’s Equity

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A balance sheet shows the financial position of your company on a certain date. You may prepare your balance sheet monthly, quarterly, or annually. The balance sheet shows your total assets, total liabilities, and owner’s equity. The balance sheet is designed so that the assets appear on the left, while the liabilities and owner’s equity appear on the right. As you’ll recall from the previous section, the sum of the assets must equal the sum of the liabilities and owner’s equity.

Prepare a balance sheet.

To start Customized Websites, Kevin Crawford and Crystal Alesio each contributed $10,000 of their own money and borrowed $50,000 from the bank to pay for computers and the necessary peripherals. Computers cost them $5,000, while printers, scanners, and software cost them

$27,500. Office furniture cost them an additional $7,500, which they have not yet paid. They are left with $37,500 in cash. Prepare a balance sheet for Customized Websites.

Customized Websites Balance Sheet

Jan 31, 20—

Assets Liabilities

Cash $ 37,500 Bank Loan $50,000

Computers 5,000 Furniture Payable 7,500

Comp. Peripherals 27,500 Total Liabilities $57,500

Office Furniture 7,500 Owner’s Equity

Capital 20,000

Total Assets $77,500 Total Liabilities and

Owner’s Equity $77,500

Find the total assets, total liabilities, and owner’s equity.

5. To start Valley Dental, Dr. Moore and Dr. Peters each contributed

$7,500 of their own money and borrowed $100,000 for equipment and supplies. Dental equipment cost them $81,000 and supplies amounted to $3,467. They also have unpaid taxes

Standardized Test Practice

Total Bank Wages Total Owner’s

Cash Inventory Supplies Assets Loan Owed Liabilities Equity

$25,000 $ 17,500 $2,150 a. $ 7,500 $15,500 b. c.

50,750 127,000 5,936 a. 100,000 42,385 b. c.

62,375 38,624 491 a. 0.00 27,247 b. c.

35,000 132,585 9,462 a. 150,000 0.00 b. c.

Practice Example

Calculating a Balance Sheet

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Besides your balance sheet items, you’ll also need to know whether your company is operating at a profit or loss. To determine whether you are making money or losing money, you must know your sales figures, your expenses, and your cost of goods sold. Your cost of goods sold is equal to the value of the beginning inventory plus the cost of any goods received (receipts) minus the value of the ending inventory.

Find the cost of goods sold.

Customized Computers began the month with an inventory valued at $137,250. During the month the company received 50 monitors that cost $75 each, 30 printers that cost $99 each, and 40 CPU’s that cost $450 each. The inventory at the end of the month was valued at $119,385.

What was the cost of goods sold?

1. Find the receipts.

(50  $75)  (30  $99)  (40  $450)  $24,720 2. Find the cost of goods sold.

Cost of Goods Sold  (Beginning Inventory  Receipts)  Ending Inventory ($137,250  $24,720)  $119,385  $42,585

Find the cost of goods sold.

5. At the beginning of the quarter, O’Reilly Associates had an inventory valued at $274,184.

During the quarter it received three shipments of merchandise valued at $137,316, $89,622, and $36,431. The value of the inventory at the end of the quarter was $179,034. What was O’Reilly Associates’ cost of goods sold?

6. Summer Sensation’s inventory on July 1 is valued at $67,295.

Throughout the quarter it received 125 bathing suits at a cost of $22.50 each, 250 pairs of shorts at a cost of $7.50 each, and 200 tank tops priced at $3.25 each. The value of the inventory on September 30 is $31,429. What is Summer Sensation’s cost of goods sold for the quarter?

A. $5,337.50 B. $72,632.50 C. $30,528.50 D. $41,203.50 Standardized Test Practice

Beginning Ending Cost of

Inventory Receipts Inventory Goods Sold

$100,000 $ 25,000 $ 95,000 58,500 21,250 37,975 87,791 26,342 38,427 257,386 122,518 174,352

Practice Example

Determining the Cost of Goods Sold

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Your income statement, or profit-and-loss statement, shows your income and operating expenses in detail. If your gross profit is greater than your total operating expenses, your income statement will show a net income, or net profit. If your company has total operating expenses that are greater than your company’s gross profit, your company’s income statement will show a net loss.

Find the net income.

Customized Computers’ cost of goods sold for the month of January was $42,585. Sales for the month totaled $75,389, of which $627 was returned. Accounting records show that Customized Computers’ operating expenses totaled $16,328. What is its net income for January?

1. Find the gross profit.

Gross Profit  Net Sales  Cost of Goods Sold ($75,389  $627)  $42,585  $32,177 gross profit 2. Find the net income.

Net Income  Gross Profit  Total Operating Expenses

$32,177  $16,328  $15,849 net income

Find the net sales, the gross profit, and the net income.

5. Summer Sensation’s sales for the third quarter were $192,428, of which $2,327 was returned. Its cost of goods sold was $41,203. Its operating expenses for the quarter were $75,379. What is Summer Sensation’s net income?

A. $190,101 B. $73,519 C. It has a net loss. D. $148,898 Standardized Test Practice

Total Net Cost of Gross Operating Net

Sales Returns Sales Goods Sold Profit Expenses Income

$ 15,375 $ 395 a. $ 9,000 b. $ 3,250 c.

47,267 2,653 a. 24,156 b. 13,268 c.

99,514 7,103 a. 51,398 b. 22,261 c.

318,516 0 a. 197,234 b. 86,572 c.

Practice Example

Completing an Income Statement

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Your business might analyze its income statement by finding what percentage any given item is of the net sales. Your business might also analyze its balance sheet by finding certain defined ratios.

The current ratio is the ratio of total assets to total liabilities. The quick ratio, sometimes called the acid-test ratio, is the ratio of total assets minus inventory to total liabilities.

Percentage of Net Sales  Amount for Item  Net Sales Current Ratio  Total Assets  Total Liabilities

Quick Ratio  (Total Assets  Inventory)  Total Liabilities

Find the percentage of net sales.

Customized Computers’ net sales for January amounted to $74,762. According to its income statement, its cost of goods sold amounted to $42,585. What is the cost of goods sold as a percentage of net sales, rounded to the nearest hundredth percent?

Find the percentage of net sales.

Percentage of Net Sales  Amount for Item  Net Sales

$42,585  $74,762  56.96% of net sales

Find the percentage of net sales, rounded to the nearest hundredth percent.

Find the current ratio and the quick ratio, rounded to the nearest tenth.

5. Summer Sensation’s sales for the third quarter totaled $192,428, of which $2,327 was returned. Its cost of goods sold totaled $41,203. What is its cost of goods sold as a percentage of its net sales?

A. 21.4% B. 4.7:1 C. 21.7% D. 4.6:1 Standardized Test Practice

Total Assets Inventory Liabilities Current Ratio Quick Ratio

$125,000 $ 32,000 $ 50,000 a. b.

287,960 116,327 137,233 a. b.

Amount for Item Net Sales % of Net Sales Gross profit $55,000 $250,000

Operating expenses 18,750 55,000 Practice

Example

Analyzing Balance Sheets

and Income Statements

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When you perform a horizontal analysis, you compare two or more of your income statements for different periods. This is done by computing percentage changes from one income statement to another. When computing percentage change, the dollar amount on the earlier statement is the base figure. The amount of change is the difference between the base figure and the

corresponding figure on the current statement. If an amount decreased from one income statement to the next, the change will be expressed as a negative number.

Find the percentage change.

Customized Computers’ net sales for January were $74,762 and its cost of goods sold amounted to $42,585. It net sales for February are $81,334 and its cost of goods sold came to $40,972. To the nearest hundredth percent, what is the percent change for net sales and cost of goods sold?

Find the percentage change.

Percentage Change  Amount of Change  Base Figure ($81,344  $74,762)  $74,762  8.80% change in net sales

($40,972  $42,585)  $42,585  3.79% change in cost of goods sold

Find the percentage change, rounded the nearest hundredth percent.

Income statements for O’Reilly Associates showed these figures for July and August. Find the amount of change and the percentage change.

9. Summer Sensation’s sales for the third quarter totaled $192,428, of which $2,327 was returned. Its net sales for the fourth quarter totaled $191,397. What is the percent change of net sales?

A. 0.54% B. 0.68% C. 0.54% D. 0.68%

Standardized Test Practice

July August Amount of Change % Change

Net sales $205,255 $200,398 a. b.

Cost of goods sold 138,357 142,792 a. b.

Gross profit on sales 66,898 57,606 a. b.

Operating expenses 36,326 41,285 a. b.

Net income 30,572 16,321 a. b.

Last Year (Base) This Year % Change

$650,000 $700,000 59,000 52,500 136,275 142,357

Practice Example

Comparing Income Statements

Using Horizontal Analysis

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Preparing Your Financial Statements

In this review, you will prepare a year-end balance sheet and income statement for Your New Business. You will then use the information in those financial statements to answer some important questions about your company.

1. Your New Business had the following assets and liabilities at the end of the year:

Cash: $37,250 Supplies: $5,000 Unpaid Merchandise: $7,500 Inventory: $22,375 Bank Loan: $25,000 Taxes Owed: $3,475

Land: $15,000 Building: $150,000 Real Estate Loan: $175,000

Prepare a balance sheet for Your New Business.

2. At the beginning of the year you started your business with $500 worth of inventory.

Throughout the year you received four merchandise shipments in the amounts of $15,000,

$27,500, $36,250, and $18,750. Your year-end inventory was $10,000. What was your cost of goods sold?

3. Using the information given in Problem 2 and the following, prepare a year-end income statement for Your New Business:

Sales: $150,000; Returned Merchandise: $1,500; Operating Expenses: $35,000.

4. What percentage of net sales was your cost of goods sold?

5. What is your current ratio?

6. What is your quick ratio?

7. If you estimate your net income for next year to be $30,000, what will the percent change for net income be?

Chapter Review—Answers

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